Coffee Drinkers Won’t Get Price Break as Colombia Supply Slumps

Colombia, the second-largest producer of mild arabica coffee bought by companies such as Starbucks Corp. (SBUX) and Nestle SA, said consumers will have to get used to higher prices because of rising demand and reduced supply.

Production next year will fail to meet demand, keeping the cost of arabica coffee in a range of $2 to $3 a pound for the next 12 months, according to Colombian National Coffee Growers Federation’s Chief Executive Officer Luis Munoz. Higher prices are also reflecting increased farming costs, he said.
Coffee has almost doubled in the past year as storms hurt plants in Colombia and consumption increases globally. Rising costs are prompting Starbucks to boost the price of bagged coffee sold at U.S. cafes by an average of 17 percent, according to spokesman Alan Hilowitz. The company will likely continue to be an “important” buyer of Colombian coffee, Munoz said.

“The final consumer is realizing that you have to pay a bit more for those little enjoyments,” Munoz said yesterday in an interview at the federation’s headquarters in Bogota. “Not just Starbucks, but the industry in general, wouldn’t have been able to do anything besides raising prices.”

Higher prices reflect how increases in farming costs, like more expensive fertilizer, are starting to be passed onto consumers, Munoz said. At the same time, coffee drinkers from Brazil to Asia are increasing consumption and are willing to pay more for high-quality coffee, Munoz said. J

Arabica coffee for July delivery rose 0.75 cents, or 0.3 percent, to $2.6560 a pound at 1:00 p.m. on ICE Futures U.S. in New York. Coffee reached $3.089 a pound on May 3, the highest since May 1997.

Storm Damage

In Colombia, storms last year that damaged flowering likely will cut the second-quarter crop by about 10 percent to about 2 million bags, according to Munoz. Worldwide, producing nations’stocks are at “precarious” levels and won’t make a sustained recovery, partly because of adverse weather, he said.
“It’s been raining here for two years,” Munoz said.

The Colombian harvest will improve in the second half of the year, he said. The federation, which represents the majority of Colombia’s more than 553,000 coffee growers, forecasts 2011 production will be 9.5 million bags, compared with 8.9 million bags last year. In April, output declined 19 percent to 523,000 bags, from 647,000 bags a year earlier.

Global coffee supplies will likely be “tight” through the rest of the year as stockpiles held by exporting nations such as Colombia stay near a 40-year low, Jose Sette, head of the International Coffee Organization, said in February.

Brazil is the largest producer of arabica beans.

Source: Bloomberg

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